Meridian

Rule-based regime rotation is an established approach to tactical asset allocation. The underlying idea is straightforward: equity markets move through periods in which taking risk is rewarded, as well as periods in which capital preservation becomes more important. Remaining invested during favorable market phases and shifting toward more resilient assets when market conditions deteriorate can help reduce the depth of drawdowns over a full market cycle without giving up a substantial share of the upside. Meridian makes this distinction not through forecasts, but through a clearly defined market observation. As long as the equity market remains in an established uptrend, the strategy maintains a growth-oriented equity portfolio. When that trend loses significant strength, the portfolio rotates into a diversified defensive allocation. The strategy neither attempts to predict turning points nor to time the market. It responds to a measurable change in observable market behavior.

The primary purpose of regime rotation is to limit severe drawdowns. In the model calculation since 2004, Meridian had a maximum drawdown of −26.2%, compared with −53.1% for the SPY. Volatility was also lower, at 13.8% compared with 17.1% for the SPY. These differences are less a statement about higher returns than an indication of a different risk profile. A lower drawdown can make a material difference over longer investment horizons, because losses have an asymmetric effect on the return required to recover. The strategy is not designed to eliminate losses altogether. Its objective is rather to reduce exposure to the most severe phases of market decline while maintaining long-term participation in equities.

The position of a leading equity index relative to its own recent trend is an observable signal of changes in the prevailing market regime. Historically, pronounced and sustained declines in growth-oriented market segments have occurred in a range of different stress environments – including the aftermath of speculative excesses, periods of pronounced economic weakness, and inflationary shocks. Meridian does not attempt to determine in advance which of these scenarios will occur. Instead, it responds to a significant deterioration in the trend by adjusting the portfolio allocation. This makes the macroeconomic interpretation of market conditions less important: what matters is not the cause of the move, but the change in observable market behavior.

Each component of the risk-off portfolio serves a distinct purpose. A continuing equity allocation preserves participation in market recoveries and more defensive equity segments. Short-term government bonds serve as a stabilizing component and can benefit from falling interest rates, particularly during periods of weaker growth. Gold adds an independent source of diversification and can provide a hedge against inflationary developments and monetary debasement. The key is the interaction of these different return and risk drivers. The defensive allocation is not designed around a single stress scenario, but rather to reduce the portfolio's dependence on any one set of market conditions.

Meridian holds a limited number of equally weighted, highly liquid exchange-traded funds and is reviewed at a defined frequency. Position sizes are intentionally uniform. The strategy is fully long and unleveraged and uses only instruments with high market liquidity. Portfolio positioning changes only when the defined market signal indicates a regime change, rather than through continuous tactical adjustment.

Meridian is a rule-based response system, not a forecasting model and not a guarantee of capital preservation or a particular return. Like any trend-following approach, the strategy has specific limitations. In a slowly developing or sideways bear market, the trend threshold may not be triggered early or clearly enough. Likewise, an unfavorable entry immediately before a sharp market decline can initially result in significant losses before the signal leads to an adjustment in positioning. These characteristics are part of the approach. Meridian is not designed to avoid every setback or to identify turning points precisely. Its objective is instead to achieve a more favorable balance of return and risk over a full market cycle – in particular through shallower severe drawdowns while maintaining participation in the long-term upward phases of equity markets.